FDs suffer blow over missed earnings targets

European and US companies are unable to accurately forecast earnings for the
next quarter, according to results from advisory company The Hackett Group.
Accurate forecasts are defined as being within 5% of actual results, but the
companies missed the mark by between 6% and 30%.

‘It’s shocking to see this level of poor performance in such a key area’,
said Fritz Roemer, Hackett’s performance management advisory leader. ‘We’ve seen
companies take severe hits in the past few years after missing forecasts.
Analysts suddenly question the competence of senior leadership. In some cases,
CFOs have had to resign.’

Hackett’s claims have been reinforced by the case of Ericsson’s former
finance chief Karl-Henrik Sundstrom. Last year he became embroiled in a civil
action which could cost the mobile phone giant millions of dollars because of an
earnings scandal.

Together with chief exec Carl Henric Svanberg, Sundstrom has been accused by
US law firm Coughlin Stoia Geller Rudman & Robbins of delaying news of a
profit warning.
Coughlin Stoia claimed that the pair knew of the earnings issues a month before
they held an investor conference in London on 11 September 2007.

‘Stock prices become unstable and valuation drops dramatically,’ said Roemer.
‘Yet companies still refuse to make the necessary efforts to get this area under
control.’

When the market was informed of Ericsson’s position on 15 October,
shareholders lost out as the company’s market value nosedived by about $15bn
(£7.2bn). Sundstrom resigned soon after the warning was issued. In addition,
forecasting is becoming ‘significantly’ tougher, Hackett found. Of the 70
companies in the study, 14% characterized themselves as high risk/high
volatility, a seven-fold increase compared to three years ago. Hackett predicted
that this trend was likely to rocket by nearly 50% over the next two years.

‘These are very basic steps that almost any company can use to significantly
improve their forecasting,’ added Hackett finance practice leader of global
advisory programmes Bryan Hall.

‘By using rolling forecasts, which force companies to look beyond the
artificial horizon of their year-end, by considering risk and volatility, and by
measuring accuracy in forecasting, companies can make real improvements in this
key area, and reap rewards from the investment community.’